Changing Central Bank attitudes: gold to be strongest asset class

Poll of Central Bankers suggests they expect gold to outperform equities, bonds, currencies – and oil. If they aren’t selling gold it’s probably a good job that no-one wants to borrow it either.

Author: Rhona O’ConnellPosted: Friday , 25 Jun 2010

LONDON –

At its recent annual seminar for reserve management, investment bank UBS polled over 80 reserve managers from the official sector as to their views on different reserve assets. One outcome was that gold was expected to be the strongest asset class in the second half of this year, while 22% of those polled thought that gold would be the most important reserve asset over the next 25 years.

This may seem like a long time horizon, but central bankers have to think in the long term as custodians of national wealth (expect, of course, when governments get in the way and insist on, for example, gold disposals with prior publicity). The view underpins the swing in attitudes towards gold in the official sector that has been evolving. Clearly the shifting tides in sentiment are informed by increased concern over fiscal imbalances, currency dislocations and sovereign risk, all of which have escalated over the past eighteen months, and which are therefore helping to change a trend of sales that was most-recently re-established in 1989.

Figures from Consolidated Gold Fields (as was) and GFMS Ltd, which assumed responsibility from Consolidated Gold Fields for compiling the Gold Survey when the former company was taken over by Hanson Trust (after a mighty tussle with Minorco) in 1989, show that over the 62 years 1948 to 12009 inclusive, the official sector has been a net seller for 34 years, or 55% of the time. The sector was a net buyer from 1948 through to 1966, during which time it absorbed almost 8,000 tonnes. Since then it has offloaded just over 10,000 tonnes, with world holdings, as reported to the IMF, standing at a shade below 30,200 tonnes. The latest figures for world holdings, which relate to end-March, show a tonnage of 30,463t, reflect a 180t reclassification of Saudi’s holdings, while much of the balance of the increase registered to “all countries”, some 39 tonnes, comes from the acquisition programmes of Russia and the Philippines, plus, to a lesser extent, Venezuela.

Annual and cumulative changes in the official sector’s gold mountain (metric tonnes) – back to the post-world war II position?

CBGA signatories have, since the first Agreement was signed in September 1999, been responsible for 3,906 tonnes of the official sector’s net disposals, equivalent to approximately 90% of the total. CBGA sales have collapsed this year with less than one tonne coming onto the market under CBGA3 so far this calendar year. The majority of sales into the market since January have come from the IMF, which has sold almost 39t into the open market this year, leaving almost 153t to go.

The implication from official statements from both the CBGA signatories and the IMF itself suggest that any further disposals into the open market (and it would look likely that the balance of the metal will come on-market unless a fresh central bank suddenly appears on the scene) will be worked, at least on a de facto basis, under the auspices of the CBGA. Once this metal is out of the way then it s entirely possible that the official sector will become a net buyer of gold again for the first time since four years of purchases that amounted to over 630 tonnes (9% of mine supply) in 1985-1988. This was when producing countries were absorbing local production and others – notably Taiwan, amid much publicity, were – wait for it -diversifying away from the dollar….